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Trade Policy

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Tariffs. This is custom duty levied on imports and exports. That which is levied on imports serves as revenue and protection. Tax on exports provides revenue, conserves domestic resources and stimulates the growth of domestic industries. If violation of custom rules of the importing country occurs then penalty duties are levied.

Subsidies. These are government payments to a domestic producer. They help the manufacturers set prices that are not completely dependent on the cost of production.

Quantitative controls. These take the form of import quotas, export quotas and voluntary quotas. Import quotas are used to protect domestic markets from foreign competition. Export quotas limit the raw materials and manufactured goods leaving a country. Voluntary quotas respond to pressure exerted by domestic producers or organized labor.

Boycotts and embargoes. A boycott is an official act to discourage relations with a firm, country or a person. An embargo is an official act to prohibit the import of a product.

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Exchange controls. They are commonly used during war. They limit the import of those commodities which do not fit government plans.

Foreign direct investment

FDI is the long term participation in management, joint-venture, transfer of technology and expertise by a country (Chaffee 93). FDI benefits the host country in the following ways:

  • Resources transfer effects; supply of capital, technology and management resources.
  • Employment effects; brings jobs directly by MNE employing and indirectly by suppliers employing. MNE ays higher wages.
  • Balance of payment effects; tracks payments to and receipts from other countries. FDI can substitute for imports and can export to other countries.
  • Effects on competition and economic growth; Green-field increases the number of players, increase competition. Competition drives down prices and benefit consumers. Increased productivity, innovation and economic growth
  • Adverse effects on competition; MNE subsidiaries may have greater economic power than indigenous firms
  • Adverse effects on balance of payments; too much outflow so restrict the amount that can be repatriated. Too much importing of components vs. local sourcing
  • Perceived loss of national sovereignty; Key decisions that effect host economy will be made by foreign parent with no commitment to and no control by host country

FDI   benefits the home country in the following ways:

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  • Inward flow of foreign earnings; May also create demand for home country exports of equipment & goods
  • Employment effects; Jobs created by demand for exports
  • MNE learns valuable skills that can be transferred back; reverse resource-transfer contributing to home country economic growth rate
  •  Balance of payments; Suffers from initial capital outflow to finance FDI. Suffers if purpose to supply home market from low-cost production location. Suffers if the FDI is substitute for direct exports.
  • Employment effects; Suffers when FDI is substitute for domestic production – reduced home country employment.

Fixed and Floating Exchange Rates

An exchange rate is the price which one country’s currency traades for on another on the foreign exchange market.

Floating exchange rate is a market driven price for currency and it is entirely determined by the free market forces of demand and supply of currencies with no government intervention.

Fixed exchange rate; here the government is not willing to let the currency float freely and a level at which the exchange rate will stay is stated.

Some countries ought for the floating rates since there is automatic correction of the exchange rate as the country let it float freely. There is also insulation from external economic events as the country currency is not tied to a possibly high world inflation a rate is under fixed rate(Henderson 154). Governments are also free to choose their domestic policy as it allows for automatic correction of any balance of payment disequilibrium that might arise from the implementation of domestic policy.

Other countries opt for the fixed rates because despite its rigidity there is certainty of the exchange rated as it is fixed. International trade and investment is less risky. It is also advantageous in that there is little speculation on a fixed exchange rate.

Liberalizing the EU energy market

This market covers coal, oil, nuclear energy, electricity and gas. The benefits of this liberalization include;

Creation of a single market, providing the most effective and safest most competitive energy market, all companies will enjoy equal access of the market as all restrictions will be removed, there will be transparency of prices, and there will also be a security of supply (Boot 101).

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